目前，3月期美债收益率降至4.9%左右，年内最低； Source: Wind
Although the Fed's rate cut in September is almost certain, there is still controversy over the magnitude and speed of the rate cut. As the rate cut approaches, the bond market seems to have already priced it in.
U.S. Treasury bond rates
With the approaching of the Federal Reserve's interest rate meeting on September 18, it is widely expected that the Fed will cut interest rates for the first time since 2020, and this expectation has led to a sharp increase in U.S. bond prices.
Currently, the 3-month U.S. Treasury bond yield has dropped to around 4.9%, the lowest of the year; $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ also dropping to the level of 3.7%.
sensitive to policy $U.S. 2-Year Treasury Notes Yield (US2Y.BD)$ , the yield has dropped to around 3.6%.
The current range of the U.S. federal funds rate is 5.25%-5.5%, with implied rate cut expectations from CME interest rate futures exceeding 100 basis points.
Data shows that in the last three rate cut cycles by the Federal Reserve, the average rate cut was 425 basis points.
The current U.S. bond yield has already priced in some rate cut expectations, and some analysts believe that the bond market has already significantly outperformed the market.
John Madziyire, Senior Investment Manager at Vanguard, said that it is well known that the Federal Reserve needs to cut interest rates, but the key lies in the speed. If the rate cut is too fast, it may lead to a reacceleration of inflation. He believes that the current bond market has risen too fast and has taken a tactical short position on it.
Bob Michele, Asset Manager at JPMorgan, also believes that the bond market has already anticipated the actions of the Federal Reserve. Although the economy is slowing down, it has not deteriorated. He prefers to invest in corporate bonds with higher yields rather than Treasury bonds.
The magnitude and pace of rate cuts by the Federal Reserve
Although the market believes that the Federal Reserve's interest rate cut in September is almost a certainty, there is still controversy over the size and speed of the rate cut.
The CME FedWatch tool shows that the market is currently pricing a 50% probability of a 25 basis point rate cut and a 50 basis point rate cut at the September 17-18 meeting of the Federal Reserve.
Reasons to support a 25 basis point rate cut by the Fed:
If the economy appears to be weakening, it is possible to increase the subsequent interest rate cut.
It can be done without causing an inflation rebound.
3. Starting with a 50 basis points could lead to the market mispricing future actions.
Christopher Rupkey, Chief Economist at FWDBONDS, said, 'Producer prices are not too hot, and the labor market has not deteriorated significantly, so Fed officials may not need to surprise the market next week with a larger-than-expected 50 basis point rate cut.'
Peter Cardillo, Chief Market Economist at Spartan Capital Securities, said, 'The fact that non-farm payrolls added more than 0.1 million jobs in August weakens the possibility of a 50 basis point rate cut at the September Fed meeting. However, downward revisions to data in previous months indicate that the Fed needs to cut rates by at least a cumulative 75 basis points this year.' With three more Fed meetings scheduled for this year, each meeting only needs to cut rates by 25 basis points to achieve this goal.
Reasons to support a 50 basis point rate cut by the Federal Reserve:
1. Does the Fed still want to maintain a strict stance when the unemployment rate is rising?
2. The Fed can dispel market concerns about its actions being too slow through extensive wording.
3. If the Fed has truly reached "balance", then a 25 basis point action is meaningless.
Faust, a researcher at the Johns Hopkins University Center for Financial Economics, said, 'I am more inclined to start with a 50 basis point rate cut. The Fed can easily address investors' concerns about larger rate cuts by providing a lot of rhetoric to make it less frightening.'
Former New York Federal Reserve Bank President Dudley said, 'If the balance of risks between rising inflation and a weak labor market really does reach equilibrium, as Fed officials have said, then the Fed should want interest rates to be closer to a neutral level. Considering that all Fed officials believe rates should be below 4%, starting with a 25 basis point cut is meaningless. Logically, they should move faster.'
Editor/Rocky
